The Hardscrabble Business of Chinese Manufacturing in Africa

November 07,2017 22:26

So, these people that come out of that business, you know, lots of them never finished high school, much less college. They go straight as teenagers into working their way up factories in China, and they learn the business from the ground up, and they ...

Irene Yuan Sun, a consultant at McKinsey, explains why so many Chinese entrepreneurs are setting up factories in Africa. She describes what it’s like inside these factories, who works there, what they’re making—and how this emerging manufacturing sector is industrializing countries including Lesotho and Nigeria. Sun’s new book is The Next Factory of the World: How Chinese Investment Is Reshaping Africa.Download this podcastSARAH GREEN CARMICHAEL: Welcome to the HBR IdeaCast, from Harvard Business Review. I’m Sarah Green Carmichael.Right after Irene Yuan Sun graduated from college, she went to Namibia, in southwestern Africa, to teach English at a rural public school. She didn’t expect it to be such a lonely, challenging year.IRENE YUAN SUN: I didn’t really see myself making a difference in the future of African people that I was supposedly trying to help.SARAH GREEN CARMICHAEL: She also missed her mother’s Chinese cooking. So, to make something that tasted like home, she went into town to buy vegetables imported from China. The shop owner ended up inviting her to have dinner with him and a group of Chinese factory bosses. And after several drinks, the men were spitting at the table and pulling out their guns. They also forever changed the way she thought about development.IRENE YUAN SUN: You have people who are extremely practical, extremely rough, unpolished people, but they’re creating businesses that create real jobs.SARAH GREEN CARMICHAEL: Sun asked herself: Who are these people? What are they doing? And what sort of impact are they having?Later, as a consultant for McKinsey, she toured Chinese-owned factories in Africa to study how they were affecting countries’ economies and societies. She went to one in Kenya making spare parts for heavy machinery. Another in Ethiopia producing gel capsules.And she saw a kind of entrepreneurship that’s totally distinct from what’s happening in Silicon Valley. It’s much riskier, she says, than venture capitalists investing in tech startups—and the payoff can be incredible.Sun’s written down what she’s discovered through her factory visits and research, in her new book, The Next Factory of the World: How Chinese Investment Is Reshaping Africa.Irene, thanks you so much for joining us today.IRENE YUAN SUN: Thanks for having me.SARAH GREEN CARMICHAEL: You have visited dozens of factories in Africa. You have talked to hundreds of people working in those factories. You’ve talked to many entrepreneurs who started those factories. What kind of entrepreneurship would you call that?IRENE YUAN SUN: Yeah, that’s been a really fascinating part of this journey, of getting to know these people who—I’m Chinese—but there they come from such a specific subculture within China. And they come from a subculture within China that’s been a huge part of transforming China itself. In 1990, China produced two percent of global manufacturing output, and now trying to produce a quarter of all manufactured products. And that is probably the biggest reason why China has gone from a low-income, extremely poor country to a middle-income country.So, these people that come out of that business, you know, lots of them never finished high school, much less college. They go straight as teenagers into working their way up factories in China, and they learn the business from the ground up, and they slowly accumulate their own savings and start their own factories, often as smaller subcontractors to bigger factories in China.And then over the last few years, they start seeing their margins become compressed, their profits going down because all kinds of costs are rising in China. And so, they start looking for other places where they could manufacture. So, this is the offshoring story. You know, we in the U.S. are so often thinking about the effects of U.S. factories offshoring and where those jobs go. In China, a lot of that same thing is happening today. And Africa is one of those places that is relatively underexplored, where labor costs are relatively low, competition is relatively low; and so, some of these people end up in Africa, and they’re such adventurous, fly-by-the-seat-of-your-pants kinds of people. You know, lots of them show up in Africa without knowing English or French or Swahili or whatever the local language is, and they are entrepreneurial in the sense of they make it work.You know, I think we’re so used to associating entrepreneurship with the sort of techiness. One of the interesting parts about this journey is just how entrepreneurship in this part of the world is if anything more adventurous and more risk embracing, but, you know, not necessarily with that techiness, is actually associated with this almost oldest of industries, which is factory work.SARAH GREEN CARMICHAEL: Some people listening might hear echoes of Western colonialism in Africa in how we’re talking about this. And I just want to sort of pause here at the beginning of our conversation to ask you about that.IRENE YUAN SUN: I think it’s important to distinguish between downsides of industrialization and foreign investment, which are real and deserve a lot of consideration in terms of how we address those downsides, for labor, for the environment, for general governance, versus the notion of neocolonialism. The way that Western colonialism unfolded was a military, political, and economic, all rolled into one.And, you know, the way that China has engaged in Africa certainly has a government element where there is strong government-to-government relationships, at least between some African countries in China, and some of those are growing stronger with things like the belt-and-road initiative and policy-backed banks investing. But there is this small military dimension now in the sense that China has a military base, just started in a military base, in Djibouti right next to the French and the American military bases in Djibouti that have been there for a long time.But there’s been no sense in which China has ever sent troops to occupy parts of Africa, and there has been no attempt to, sort of, colonize, in the political and state sense, African nations. And so, the term in all of this gets wrapped up with concerns and often gets conflated with very real and very valid concerns about the downsides of industrialization. It is a very different animal than colonialism, and we shouldn’t confuse the two.SARAH GREEN CARMICHAEL: Why in your view is industrialization a necessary part of economic development?IRENE YUAN SUN: I think the reality of the situation is that for almost all the countries historically that have lifted themselves out of poverty in a sustainable way, almost all of them had to industrialize first before becoming predominantly service oriented. And the reason is in the nature of what poor countries have comparative vantages in, which is, poor countries have a large labor pool; they have relatively unexploited markets that are fairly uncompetitive; and they’re not in a position, primarily, to compete in high-end service industries that require very skilled and educated labor force.And so, while the ultimate end of the journey is to get there, there is this middle portion of it that you, sort of, can’t bypass realistically. And for Africa, this is a particularly acute situation. Africa is about a billion people in population today, and it’s on the foot of what demographers think is a population explosion, where 50 years from now it’s going to be two billion people, and so a doubling in population.Meanwhile, Africa has, I’m sorry to say, the worst educational systems in the world. The literacy and basic numeracy outcomes of even people who go to school, much less a significant portion of young people who don’t end up going to school regularly, is appalling. And so how do you employ all these people? How do you get them to, you know—by the way, being employed means being a consumer. And so, you have this feedback mechanism. The only way they get onto that on track of becoming producers and consumers in a way that’s connected to the global economy is if they’re countries industrialize.SARAH GREEN CARMICHAEL: How do you think the industrialization of Africa will actually be different and unique from what we’ve seen already in other places?IRENE YUAN SUN: One opportunity that Africa has is actually to learn from countries that have industrialized in the last generation and to avoid some of the mistakes that they made. But I think the other way in which industrialization will be very different than, at least to happen in China, is that Africa is not one country. It’s 54 countries. I think we’re going to see a much wider variety of business models. We’re going to see a much wider variety of industries as a subset of these countries. And I don’t want to suggest that all African countries are interested in even in industrialization, but a fair number of them are.From the very nature of having such diversity of countries, they’re going to find their own unique niches, their own unique value chains where they have some comparative advantage and where they can plug into global business, and they’re going to attract different parts of global business to help them do that.And so, I think we’re going to see actually a much greater variety in the business models and forms of industrialization in Africa than in the countries that industrialized in the last generation.SARAH GREEN CARMICHAEL: So, what are some of the products that Chinese factories are producing in Africa that you and I might use every day, that we might be wearing right now?IRENE YUAN SUN: So, American consumers probably don’t know that actually a significant portion of the clothing that we wear comes from Africa. So, most people probably haven’t heard of a small country in southern Africa called Lesotho, this tiny country that’s sort of like a dot in the middle of South Africa. And Lesotho is one of the poorest countries in the world. But there is a clothing sector there where there are factories that make jeans for Levis. There are factories that make yoga pants for Kohls. They make athletic wear, T-shirts and gym shorts for Reebok. And they’re Asian factories. So, they’re Taiwanese- and Chinese-owned factories that these big clothing brands we all know contract to with their styles every season, and they run factories that employ each of them hundreds of people in Lesotho. They predominate employ women. So, there are about 70 percent women, all of whom are locals, and they, sort of, just turn out the fashions that we’re used to, and they ship all this to the U.S. to be sold.But there’s also a lot of other kinds of goods that are very different that’s being produced by Chinese factories in Africa. So, everything from steel to ceramic tiles to plastic bags to tissue paper. I mean, it runs the full spectrum.SARAH GREEN CARMICHAEL: Why is it that women are always the ones who get these textile jobs?IRENE YUAN SUN: Part of the reason is that the factory owners, many that I speak to, actually prefer to employ women, particularly for jobs that require manual dexterity. And so, you know, clothing, sewing, these are in part because more women, or a larger proportion of women, have some experience doing this at home. The factory owners actually feel like women are just—they come in having some sort of experience, being better employees at these sorts of jobs.The other part of this is that, you know, when we talk about an untapped labor pool and therefore a source of competitive advantage, in a lot of these countries, including in China back in the 80s and 90s, a lot of the untapped labor pool actually are women. You know, the men in Lesotho are the ones that for generations have gone out to work in South African mines. And so, there’s a sense in which if you need workers, the biggest pool that don’t already have jobs are actually women, and so they end up being this new vanguard of the workforce. And part of what I talk about in the book is how that actually sparks social change in these countries. And so, I tell the story of three women in Lesotho who actually start as factory workers and then get involved in the union movement as a way to actually make a difference in the lives of themselves and their friends who all work in Asian-owned factories Lesotho. And they’re now in middle management, and they’re starting to contemplate the possibility that they could take national leadership positions in the union, which is hugely important in politics. And that is unheard of in Lesotho, extremely traditional, male-dominated societies. So, for these women to be imagining this, it just shows how far reaching the consequences of factories and industrialization can be.SARAH GREEN CARMICHAEL: You know, you visited so many of these factories in doing the research for this book. What does it look like and sound like when you’re in there?IRENE YUAN SUN: It depends a lot by what kind of factory it is. So, I have been in factories that run the full gamut. Just to start with the sort of factory that we have been talking about, which is a labor-intensive clothing factory. These are large warehouse rooms but that are filled completely with sewing machines. So, imagine, like, a big room the size of a soccer field but with 300 sewing machines all lined up, 10 in a row for 30 rows. And there is a woman sitting at every sewing machine, and they’re passing little bits of cloth, because each of them does one seam, and then they pass it on to the next person, and she does one seam, and then she passes it on. When you stand back there’s just this cluck clack clack clack clack. The workers will get up every once in a while to deliver a batch to the next step or to use the restroom or to get a cup of tea.But for the most part, this is a pretty intense work environment. Everybody’s working all the time. You contrast that with a capital-intensive factory. An interesting counterpart would be a textile factory, which operates very differently. I mean, this is even bigger. So, multiple football-field-sized factory; and you go through, and you see almost no humans at all through the entire course of walking through this thing. It’s just giant machinery that has automated almost all the steps, from cleaning the cotton to spinning it into thread to weaving it into cloth to dyeing it into denim, drying, and rolling it. And there are a few people scattered throughout here and there, but mainly it’s this gleaming, multimillion dollar machinery. It’s not a very social work environment. And these two kinds of factories are just right next to each other.SARAH GREEN CARMICHAEL: Well, so, there’s differences in specific factories and then in different industries. And I’m also curious to know about some of the differences you saw in these different countries.IRENE YUAN SUN: Nigeria is an extremely different case. Nigeria is the largest country in Africa by population. And right now, it’s vying head to head with South Africa in terms of the largest GDP in Africa as well. So, it’s a huge domestic market. And it’s a domestic market, though, that is the locking in the availability of many simple manufactured consumer goods. The Chinese factories that go into Nigeria actually are not exporting the majority of their product. They’re selling almost all their product for the domestic market because so many goods still in the Nigerian marketplace are being imported. And so, there’s this great business of just going in, if you have them working your way up factories, and you figure out you can source some of the raw materials from Niger itself, and you are efficient in running a factory, you can make a great margin.And one of my favorite examples of this is a factory in eastern Nigeria where they’re actually taking shipwrecks in the coastal waters, and they break down these ships, so they hire hundreds of welders to break down these giant ships, and then the re-smelt the steel from these ships into steel bars for local construction.You know these Chinese entrepreneurs are so opportunistic in seeing what you can use from a local context and turning that into a tangible good.SARAH GREEN CARMICHAEL: So, what about economic mobility? When you have done these research trips, have you met, you know, someone who started on the factory floor but moved into management?IRENE YUAN SUN: So, one of the most striking people that I’ve met on this journey is a man named Ahmed who is from northern Nigeria, which is the poorest region of Nigeria. And he started doing odds-and-ends jobs for this Chinese factory owner. And slowly he proves himself and gets more and more responsibility, to the point that one day, the boss comes in with business cards for him that say Ahmed Ibrahim, factory manager.For Ahmed, getting this position ends up meaning that he can get married. And he’s brought actually his family, so his brother works in the same factory. His neighbors from his home village, several of them have come, and so he’s like literally brought his village to work as well. And so, it’s totally transformed his life.SARAH GREEN CARMICHAEL: Tell me about Mrs. Zaf from Ethiopia, who works in pharmaceuticals.IRENE YUAN SUN: Mrs. Zaf is an Ethiopian entrepreneur. She started out as a pharmacist in Ethiopia during a very difficult time of famines in Ethiopian history. And she, through that job, sort of, saw the need for medicines, both for humans and for animals. You know, livestock for example is the livelihood of many smallholder farmers in Ethiopia. And so, she starts knocking on doors of different embassies in the capital, Addis Ababa, and saying, Can I get connected to businesses from your country to import drugs and sell them here in Ethiopia? Basically no one gives her the time of day, except for the Chinese embassy, who connect her with some drug manufacturers in China, and she starts importing their drugs and distributing them across the country.And then one day, one of her Chinese business partners comes forward with this idea. Why don’t we make gel capsules? And she says, OK, but I don’t know how to run a factory. And he says, Don’t worry; I know how to manufacture gel capsules, and I know someone who actually makes the machinery in China. And so, these three parties get together, and the way she describes it, she, sort of, takes a deep breath and says, You know what? I trust these people. And so, she puts in her entire savings all of her profits from her business so far into this new venture, and this factory now accounts for basically all of Ethiopia’s pharmaceutical product exports.SARAH GREEN CARMICHAEL: If there’s such a huge opportunity in manufacturing and entrepreneurship in Africa right now, why is China the country that’s, sort of, rushing in when so many of the goods are sold to Americans. Why wouldn’t American companies just go in themselves and do this?IRENE YUAN SUN: The U.S. has very few factories left to offshore in the first place. Whereas China, because it does produce a quarter of the world’s manufacturing output, there is all these factories that could go somewhere else. And so many of them are starting to do that today. And especially the factories in the sort of small and medium size that are most suited to the African context.The other reason is just where these people are coming from and the lifestyles that they’re used to. And so, one theme that I hear a lot in doing this research and meeting these Chinese entrepreneurs in Africa is, this place—you know, and sometimes they’re talking about Nigeria; sometimes they’re talking about Lesotho; sometimes they’re talking about Kenya—they say to me, this place reminds me of my hometown 30 years ago. Lots of these people buy one way tickets when they decide to move to Africa and try to build a business there.They’re not going home all the time. They just go home most of the time just once a year if not for Chinese New Year. And they go out in these non-city center, non- glamorous, pretty difficult locations, oftentimes in the bush or the countryside where costs are lower where they can get a parcel of land. And they go and live in shacks sometimes, and they just make it work. And so, there’s sort of an acceptance and a personal willingness to live in these tough conditions and roll up your sleeves. I see lots of these people, when I walk into the factories, they’re grimy because they’ve been fixing some piece of machinery; or I stand there for an hour while they’re dealing with some production issue. And I think there’s very few people left like that in the U.S.There was an era not that long ago where America had lots of these people, and lots of these people went to Mexico and went to China to help set up factories there. And so, it’s not something inherent to one nationality or another, but it just happens to be that China has a lot of this sort of people today.SARAH GREEN CARMICHAEL: So, you’ve written that in another decade or two factories in Africa will be churning out computer instead of ceramics and clothing. Why is that?IRENE YUAN SUN: What I mean by that statement is that manufacturing proceeds in stages. The countries that start off now in relatively simple, easy-to-produce, unsophisticated goods, end up producing entrepreneurs that learn how to do more and more and more. And we see this in the history of the world. If you think about Korea 50 years ago, they were producing extremely simple goods like clothing, and then they get into steel. They get into electronics, and so there is this progression that entrepreneurs and manufacturers of a country go through of being able to make increasingly technologically sophisticated goods. And there’s no reason to think that Africa won’t go through the same process, that if some African countries start getting good at making things like clothing and plastics today, that those manufacturers won’t learn and actually have the market pressures to go ahead and try to get into more sophisticated goods.SARAH GREEN CARMICHAEL: Well, Irene, this has been really fascinating. Thank you for spending some time with us today.IRENE YUAN SUN: Thank you for having me. It’s been a pleasure.SARAH GREEN CARMICHAEL: That’s Irene Yuan Sun. She’s an engagement manager at McKinsey and the author of the new book, The Next Factory of the World: How Chinese Investment Is Reshaping Africa. You can find it on HBR.org.Thanks for listening to the HBR IdeaCast. I’m Sarah Green Carmichael.

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